Saturday, April 30, 2011

The Cost of a Good Emotion

I normally wake up between 4:30 and 5:00 in the morning.  Yesterday was no different, except the television was already on, showing a bunch of fancy-dressed-folks going into an ornate cathedral in London.  More importantly, there was tens of thousands of people outside cheering wildly, which is not the same thing as working hard.

British economists have already estimated the lost productivity (or the cost of work NOT done) yesterday was between $2.5 billion and $10 billion.  In other words, austerity-plagued Britain would have increased their GDP by that amount, if not for some wedding.

Of course, that is just the island of Britain.  I'm confident the other two BILLION people who watched it worldwide were not contributing much to their respective GDP either.

So, was it a waste of money?  Probably not . . . no more than having weekends off or taking a nap.  Time off is necessary to re-charge batteries.  So is silliness.  Unlike the U.S., the U.K. has already started embracing the austerity necessary to restore their financial health.  Things have been pretty glum for some time in England.  It was only a month ago that people were rioting in the street over the austerity reforms.  I think the Brits deserve something uplifting and suspect this was good for them.

Now, they need to get back to work . . . so do we!

Friday, April 29, 2011

Situational Economics

Economists often develop a religious fervor about some school of thought.  We see constant dogfights between Keynesians, Supply-Siders, and Austrian (Tough Love) economists.  Sometimes, we still hear from Monetarists.

But economics is more like situational ethics than religion.  Different ideas are appropriate at different times in different places.  Today's editorial in "The Wall Street Journal" is an example.  That newspaper is a religious devotee of Supply-Side economics, which means a tax cut can cure any problem.  Today, it argues Keynesian economics being used in this recession is wrong-headed and compares the current recovery with that of 1981-82 under President Reagan, which rebounded nicely following the Reagan tax cut.

Talk about apples and oranges!  The recession in 1981-2 resulted from a severe oil shock when the economy was already lethargic.  This one resulted from a severe financial crisis, the worst since 1929.  As we've said in this space many times, recovery from financial crisis is different from some garden-variety recession.  Tax cuts are a great way to get a lethargic economy moving faster . . . unless government revenue has already decreased from 20% to only 15% of GDP, and you are already borrowing 42% of every dollar spent.

Keynesian economics is good for getting a car out of the ditch.  Supply-side economics is like high-test gas to go faster . . . if you can afford it.  And, Austrian economics is good to make you solvent enough in the long-run . . . that you can afford high-test gas later.

Sometimes, I recommend apples and sometimes oranges. 

Thursday, April 28, 2011

Meanwhile . . . under the radar . . .

We all know the importance of international trade, but imagine trying to do business globally if there was no traffic cop.  Fortunately, 134 nations got together and created the World Trade Organization (WTO), which has been instrumental is the growth of globalization.  We need a traffic cop, a big burly one!

In 2001, it began the Doha round of trade negotiations.  This round was called "the development round" with the purpose of improving access for the emerging economies to the huge markets in the U.S. and Europe.  The theory was bringing prosperity to those nations would reduce the breeding grounds for terrorists.  Then, the emerging nations of Brazil, Russia, India and China started growing rapidly, maybe too rapidly.  Under the auspices of the WTO, they hammered us for better access to the U.S. market.  We resisted, and nothing has been accomplished in ten years.

The last time trade negotiations like this failed was in London in 1933, which was supposed to end the Great Depression.  It obviously didn't, and the Nazi economics minister advocated Germany invade Africa to improve their economy.  It is not good when trade negotiations fail!

In order to prevent the Doha round from failing, the WTO is meeting today and tomorrow in Geneva to agree on something, almost anything, to prevent a failure.  For example, it will likely require that foreign aid to emerging nations be allocated first to infrastructure needed to do international trade, such as ports and roads.  Personally, I think this would reduce overall foreign aid by the developed nations, but I'm anxious to read more details.

The late Senator George Aiken (R-VT) once said the solution to end the war in Vietnam was simply to declare victory and come home.  The WTO is apparently taking his advice by declaring victory and living to fight another day.

Dueling Coincident Indicators

We all know about leading economic indicators, i.e., those that tell us where the economy is going.  There are also lagging indicators that tell us where the economy has been and are usually not worth knowing.  Lastly, there are coincident economic indicators that tell you where the market is right now.

Two coincident indicators are underwear and guns.  People defer purchasing new underwear during bad economic times, so an increase in underwear sales is a good coincident indicator.  On the other hand, when fear rises going into bad economic times, gun sales also rise.  So, rising gun sales is a bad coincident indicator.

This week, we have learned that underwear sales rose 3%, which is the first increase in three years.  This is good!  However, we also learned that gun sales rose 12% over last year.  This is bad!

So, what's happening?  I don't know but expect the increased underwear sales reflect the improving economic environment and fear rising gun sales reflect the worsening political environment.  I hope I'm wrong!

Wednesday, April 27, 2011

A "Whew" Rally

Today, Ben Bernanke took a risk.  In an laudable effort to bring greater transparency to Fed thinking, he held the first press conference ever for a Fed Head.  There was lots of anxiety that he would accidentally say something, and the market would over-react to it.  Fortunately, it was a wonderful non-event. 

The talking heads are arguing whether he ruled out QE3 or not.  I think he did not and would have been foolish if he had.  Never throw ammunition overboard!  (He is still not concerned about inflation, but he wasn't concerned about subprime mortgages either.)

Otherwise, he did great!  In relief, the Dow rose another 60 points after his talk, closing up 95 . . . whew!

Now, we can start fretting about the Jobless Continuing Claims and Q1 GDP tomorrow . . . the risk trade is still on!  Party On . . .

Holding Our Breath

Yesterday was a great day for the market bulls, driving up the Dow by 115 points.  Quarterly corporate earnings reports continued to be strong.  In addition, the Consumer Confidence Index was unexpectedly strong.  The S&P is at a three-year high!

Today will be different.  While the continuing flow of quarterly corporate earnings is expected to remain strong, there is a huge "unknown" at 2:15 PM, when Fed head Ben Bernanke will hold the Fed's first press conference following the all-important FOMC (Federal Open Market Committee) meeting.  Mr. Bernanke's comments can easily move markets worldwide very quickly.  Today's anxiety is that he is not a confident speaker and might stumble before a withering barrage from reporters.

That anxiety is unwarranted.  Don't forget he is very experienced at dodging questions he should not answer, such as predicting dollar strength.  He always takes questions from the crowd, following his frequent speechs.  He handles inane questions from the elected children in both the House and the Senate and does so adroitly.  He even tolerates questioning from Congressman Ron Paul well.  The likelihood of him saying something stupid is remote.

But, there is little he can say at this point to make the market rally even more.  If he announced QE3, the stock market would rally slightly but not much.  However, long term interest rates would go up, as more inflation would then be expected. 

Today's risk is all to the downside.  Therefore, don't expect much movement until the risk of Bernanke speaking is behind us.  Just hold your breath . . .

Tuesday, April 26, 2011

"Sell in May?"

One of the oldest proverbs of traders (not investors) is to "sell in May and go away."  The research is pretty compelling that stocks do much better in colder months than warmer months.  I don't think this year will be any different.  There are just too many unresolved issues, even more so than usual. 

Does that mean a person should sell all stocks now and remain in cash until next winter?  Absolutely not!  Prudent investment decisions are not "black & white" or 100%.  It is not a question of being in the market or being out of the market.  It is a question of how much cash should a person hold during the warmer months to smooth the summer volatility.

Selling everything requires a precise market timing decision.  Which day is best?  How do you know the next day will not be better?  On the other side, buying back into the market requires a market timing decision.  How will you know which day is the right day or which week or which month to go back into the market?  Tight-rope walkers like traders may think they are smart to know such things, and I hope they are.

Warren Buffett once said he had no idea what the stock market would do tomorrow, but he did know where it would be in twenty years . . . up!   That's why I don't think it is ever prudent to be 100% out of the market at any time.  You never know when the bull will return.  Investors in the long-term don't have to worry about it.

But, I do like a little extra cash right now.  It's a long time before colder weather.

Monday, April 25, 2011

Playing With Matches

Forgive me, but it worries me to see our elected children in Congress playing with fire, by threatening to keep the debt level at the current level.  That means we cannot borrow anymore--immediately, we cannot borrow anymore -- on that day.  It would be immediate!  Given that 42% of every dollar spent is borrowed, which means the number of dollars spent must be decreased -- immediately.  That could easily include Social Security and Medicare and probably should. 

Since 7% of the Federal budget is required for interest payments on the existing debt, that means the cut would actually be 45%, as only 93% of the budget is available.  And, that 7% share of the budget will immediately start increasing as bond buyers will no longer accept the currently low interest payments they have been receiving and will demand much more.

As we approach the likely deadline of May 16th or so, we can expect interest rates to rise beforehand, because the outcome is so uncertain.  If you think the stock market hates uncertainty, watch the bond market!

I expect an increase in interest rates has a 99% probability if the debt ceiling is not raised, while the cut in entitlement payments is probably less than 50% but still possible.  However, it would greatly accelerate the day when the dollar would no longer be the world's reserve currency, which would damage us in so many ways.

Our national debt is pushing the current ceiling of $14.3 TRILLION, compared to a relatively paltry $9 trillion just four years ago.  More importantly, our national debt is the greatest threat to America -- yes, even greater than the muslin extremists.  But, the debt ceiling is not the right way to fix it.  It would be like using a screwdriver to drive a nail.

But, how can we protect these children from themselves?  How can we protect ourselves??


Friday, April 22, 2011

Does Anything Matter?

Without being too existential, I'm beginning to wonder why the stock market continues to bound over the famous "wall of worry."  GDP growth is slowing.  Who cares?  Unemployment is going down bitterly slow.  Who cares?  The Congressional children may cause a national disaster by not raising the debt ceiling.  Who cares?  The budget deficit this year is $1.5 trillion.  Who cares?  Did I mention we're involved in three shooting wars that have cost over $3 trillion so far, but who cares?  Does it matter that tax receipts have fallen from 20% to only 15% of GDP, but who cares anyway?

Yesterday, the market closed at three-year highs, breaking key technical resistence levels.  Yes, it looks like we are heading toward the good/bad old days when the Dow was over 14,000.

So, what is driving the market?  What does matter?  Ostensibly, it is corporate earnings, which have been surprisingly good for the first quarter.  Textbooks tell us that stock prices reflect earnings expectations.  Do we really believe earnings will continue to be unaffected by everything else?

Or, the stock market could be another asset bubble, like the housing bubble, created by the Fed to prop up our sputtering economy, but does it matter?

The Enigma of Goldman

Rolling Stone magazine once referred to legendary investment banking firm Goldman Sachs as the "great vampire squid wrapped around the face of humanity."  I don't find any reason to disagree with that.  Yet, I have great professional respect for their cold, hard, unblinking analytical capabilities.

In their latest analysis, they estimate that our GDP growth is being reduced by a whopping full percentage point at the current price level of oil.  Still, they expect the S&P to end the year at 1,500 or up about 12%, which would be a major bull move in only eight months.  And, they expect gold to end the year about $1,690 per ounce, also a 12% bull move from where we are. 

The traditional relationship of the stock market being slightly ahead of the economy and moving opposite from the price of gold seems to have broken down.  My suspicion is that the understandable flooding of dollars into the stumbling economy by the Fed is creating asset inflation in both stocks and gold.  Goldman does not regard inflation as worrisome.   We'll see . . .

Wednesday, April 20, 2011

The Tragedy of Ayn Ryan

As a child growing up near Williamsburg and Yorktown, I was always fascinated by the notion of America revolting from the tyranny of an oppressive England.  As a teenager, I enthusiastically read the books of Ayn Rand, especially Atlas Shrugged, which was a story of free-thinking people revolting against an oppressive governmental bureaucracy.  (It was a great inspirational story that finally came to the silver screen last Friday at a few, select theaters around the country.)

From her writings, the libertarian movement was born.  She is cited as the creative, philosophical genius behind the Tea Party and such people as Ron Paul.  I think this is a simplistic, misinterpretation of her work. 

As she was born and educated in Russia, much of her writing does focus on the oppressiveness of the Soviet-type of bureaucracy.  Then, she migrated to a nation born out of revolution against another government, where distrust of government was already widespread.  Unfortunately, it was a politically volatile combination.

Ayn Rand railed on the importance of standing against all of the winds of oppression, not just government oppression.  What about oppression from other sources, such as religion, social mores, tradition, or even families?  Her landmark book, Fountainhead, was not about standing up to the oppressive government but standing up to professional oppression, e.g., the architectural profession.  It was about each person having the courage to do whatever they think is best; to refuse to be oppressed.

I can imagine long-dead Rand shaking her nicotine-stained fingers at us, chastising us with her clipped Russian accent, to stand up to her own followers today, to the Rand Institute, and even to the Tea Party.  She would demand we stand up against all who would dictate our life decisions, not just the government.  A true libertarian, she has been disrespected, indeed!

Tuesday, April 19, 2011

Our "Negative" Outlook

OK, I've read the report from Standard & Poor's yesterday that said the economic outlook for the U.S. was downgraded from Stable to Negative.  I've listened to numerous pundits and read numerous analysis by people I respect.  And, I've learned very little that I did not already know.  In summary, here are my thoughts on it:

1.  The S&P believes there is a 1-in-3 possibility we will lose our AAA credit rating in the next few years.
2.  They base this opinion on their judgement of our ability or inability to make political choices.
3.  They are same organization that gave AAA ratings to countless mortgage-backed securities and CDOs.
4.  They may have done us a favor, by splashing cold water on the face of political leaders.
5.  This has happened to other nations, e.g., England and Japan, without losing their credit rating.
6.  And, of course, the stock market used the report to do what it does best, i.e., over-react. 

Their report was certainly an unexpected blockbuster yesterday but was mostly "sound and fury," signifying what we already know.

Monday, April 18, 2011

A Blockbuster From Left Field

Overnight, the engine of world economic growth, China, raised rates again, to slow their economy and the world economy.  The Finnish election went badly and will likely threaten the bailout of Portugal.  There is now serious talk of some bondholders of European governmental debt taking a loss at maturity of their bonds.  The head of the FDIC says they already have the power to dismantle banks that are "too large to fail" and should use it.  Then, a credit rating agency delivered a stunning blockbuster, when Standard & Poor's re-affirmed the AAA credit rating of the U.S. government but changed it's outlook to "negative."  This is a big deal on a busy morning!  I'll be reading the details of the S&P report as soon as it is released.

The fear of bond vigilantes roughly doubled this morning.  Interest rates are already rising.  Is it any wonder that futures now indicate the Dow will open down this morning about 130 points?

While I think it wise to take a wry, indifferent attitude toward daily movements in the stock markets, I expect to see a slight downward bias for the next month or so, unless there is another significant geo-political event or an actual downgrade to our credit.  The market has not factored in Congressional approval for lifting the Federal debt ceiling yet, for obvious reasons.  Likewise, it is still very unclear what the Fed will do about ending QE2 or starting QE3.  As always, the market just hates uncertainty.

We know what has to be done, i.e., raise the debt ceiling quickly, raise taxes, and cut spending.  The problem is that political gridlock will make the decision extraordinarily difficult.
So, take a break from reading about the market.  It could be scary for awhile, until the politicians understand bond vigalantes.  Better yet, take a vacation!

Friday, April 15, 2011

A Father's Advice

Last night at my Rotary meeting, a friend asked me what advice a father should give his grown daughters.  I promised to sleep on it and give him some thoughts this morning in my blog.  In no particular order, they are:

1.  Money is not everything in life, but it is important.  Don't be afraid of it.  Deal with it!
2.  Deal with it yourself.  It is not fair to your husband to make him deal with it alone.
3.  Males tend to take too much risk and women too little.  Take some risk, carefully!
4.  Learn to read the monthly statements.  Ask questions.  You will learn . . . a lot!
5.  It is important to invest in a diversified portfolio, which is harder than you think.  Ask questions!
6.  Don't be a day-trader, but don't hold any investment for too long.
7.  Don't believe everything that "investment gurus" (or your next door neighbor) tell you!
8.  The only good debt is to buy a home or to buy a business.
9.  The best debt is stamped "paid-in-full."
10. Teach my grandchildren how to learn about money!  It will change.  It always does.

Thursday, April 14, 2011

Lots of News This Morning

Initial unemployment claims expectently jumped 27 thousand last week, which is bad news.  Continuing claims (which is really more important) fell to the lowest level since September of 2008, which is good news.

The Producer Price Index was expected to be up 1.0% but came in better at 0.7% in March, down from 1.6% in February.  However, if you strip out food and energy, producer prices were up 0.3%, compared to 0.2% last month.  That is worrisome and will be watched closely.

Futures indicate the market will open down about 70 points but not because of our economic news this morning.  More importantly, China has put its banks on notice that they must raise more capital, which will further depress lending.  They are doing this to suppress inflation.  We will not see the customary 10% annual growth rates out of them for awhile.  Also, there was serious discussion in Greece of requiring bondholders to take a "haircut" or discount on the face value of their bonds, causing their interest costs to hit yet another record high.  As a result, Europe is down sharply this morning.

Looks like a good day for investors to read the sports page instead!

Wednesday, April 13, 2011

An Economist's Flashback

When I was a bright, young economist fresh out of graduate school, I was fascinated by the writings of Nikolai Kondratieff, who was an obscure Russian economist that rose to become the Deputy Secretary of Food for Russia.  Unfortunately, he would up in the infamous Gulag Archipelago with the famous Russian dissident, Aleksandr Solzhenitsyn.

Communists at that time believed the major weakness of capitalism was the never-ending cycle of economic recessions and depression, inflicting unreasonable and unspeakable misery on people.  Kondratieff agreed with that.  He added that there were several different types of cycles of varying lengths.  He is most famous for his work identifying the long cycle of 48-54 years, following a predictable pattern.  (Long ago, I concluded this cycle was ended in the U.S. by the creation of transfer payments, such as unemployment, welfare, and pension payments.)

But, his crime was concluding that the economic cycles of capitalism were beneficial, as it eliminated the weak and inefficient from the marketplace, similar to Darwin's evolution.   He even compared it to a woman's menstrual cycle, saying that women lived longer, because they were able to eliminate impurities that men cannot.  He concluded that each bottom in an economic cycle was better than the last bottom and that each top in an economic cycle was better than the last top.  In other words, capitalism offered greater economic progress but was often violent.  For this "crime," he suffered and died in that prison.

Today, I finished reading "Zombie Capitalism" by Chris Harman, where he details the misery caused by our capitalistic system during the global financial crisis.  While I found it both well-researched and well-written, I kept waiting for him to make the moral judgment as to whether that was good or bad in the long run.  He would NOT have been sentenced to the Gulag with Kondratieff . . .

My faith in capitalism is generally infinite, even though my faith in laissez-faire capitalism is generally finite.  But, doesn't everybody enjoy the occasional flashback?

The Camel's Nose . . .

I have long been concerned about the damage that derivatives did during the global financial crisis and their ability to cause another one.  The biggest problem is the lack of transparency.  There is no clearing exchange to understand what the market was betting on, and it is important, because it is a $583 TRILLION market.

Very little was done last year in the Dodd-Frank financial regulation bill.  One of the things was to require participants to put up more capital.  Yesterday, non-financial companies were exempted from that requirement.  For example, the airlines routinely and understandably hedge their fuel costs.  Derivatives were invented to fill this legitimate need to hedge risk.  (Beer companies hedge the cost of aluminum and hops!)  However, the new rules might have been construed to require the airlines to take capital away from more protective uses and use it to "collateralize" their derivative purchases.  This is costly, and they wanted assurance they would be exempted.  Of course, they got it.

But, I see the camel's nose coming under the tent.  Next, the commercial banks will ask for such an exemption to hedge interest rates.  Then, they will ask to be relieved of their rather limited role in policing the credit quality of the other market participants.  And, still, there is almost no transparency to what these trillions of dollars are doing in the market.  Despite all the consternation and hysterics surrounding last year's debate on financial regulation, there is virtually nothing to prevent another AIG.

If our slowly recovering economy sustains a "heart attack," it will be here.

When a Ray of Sunshine . . . Is Not

Yesterday was a lousy day in the market.  First, the world over-reacted to the news that Japanese nuclear disaster was worse than previously admitted.  Then, Goldman Sachs said it was time to sell oil, as the economy was weakening.  So, we all lost a little money yesterday.

But another report was lost in the hysterics.  The trade deficit fell 2.6% to $45.8 billion in February.  This is normally a good thing.  Imports become more expensive when the dollar falls, as it has been.  As expected, we therefore imported 1.7% less.  The two biggest reasons were that fewer cars and less oil was imported.

The mystery is why did our exports drop 1.4%.  With a weaker dollar, our exports should have risen.  The decrease was pretty much across-the-board, with drops in U.S. auto, auto parts, capital goods, semiconductors, industrial engines, oilfield drilling equipment and even farm products.  But, the report did not speculate on world demand falling, and that would be a bad thing indeed.

So, reducing the trade deficit is good news, but why did exports fall as the dollar weakened?  I'll be watching this closely.

And, just for your infomation, our deficit with China decreased 19% and with Canada by 23.8%.  At the same time, our deficit with Europe rose 23.7%, which reflects the Euro's weakness back in February.

Tuesday, April 12, 2011

A Two-Speed World

One of my favorite sources of global economic analysis is the International Monetary Fund.  Their latest report was interesting.  They said that worldwide GDP growth was a very healthy 5% last year, and will be 4.4% this year and 4.5% next year.  That sounds really promising!

However, that growth belongs to the "haves and have nots" between developed nations and emerging ones.  For developed nations, growth was 3.0% last year and will be 2.4% this year and 2.6% next year, which is pretty anemic.

For emerging nations, growth was 7.3% last year, and will be 6.5% this year and 6.5% next year.  What a difference!  In other words, those developed nations who have "things" get slow growth.  Those emerging nations who are poor and do not have "things" get rapid growth.

The most common reason attributed to this difference in growth is that emerging nations have commodity-based economies, but that is a relatively weak explanation.  More likely, this disparity in growth is the result of globalization, which is bringing the blessings of capitalism to the rest of the world.  I also think developed nations are too hidebound or too captive of past decisions to make the decisions needed in a 24/7 world, where flexibility is so important.

Whatever the reason, it is clear that most portfolios should have some exposure to the stocks of emerging markets.  The question is how much, but that depends on the individual investor.

Sunday, April 10, 2011

Happy to be Two-Thirds Wrong

Long time readers know I write a quarterly column on the economy for Inside Business, which is the regional business journal.  You can copy and paste this URL to read the latest:

In it, you will read the consensus of opinion at the conference of the National Association of Business Economics, which I attended in Washington recently, was that neither Republicans nor Democrats had the political courage to re-open any discussion on entitlements.  To my surprise, the Republican chairman of the House Budget Committee almost did that.  His new budget does attack the cost of Medicare and Medicaid but not Social Security.  So, I was two-thirds wrong . . . GOOD!

I was disappointed with his bill, which ignores means-testing and requires the very elderly to make complex decisions.  Now, let's hear his solution for Social Security.

Saturday, April 9, 2011

Whew . . . But Not WHEW!

With a flair for needless melodrama, Congress decided not to shutdown the government last night.  That is a good thing.  From an economic standpoint, Keynesian economists are shaking their head, because the economy has lost stimulus, however minutely.  Austrian economists are relieved, because the deficit is reduced, however minutely.  Of course, supply-side economists got their feelings hurt, as they were ignored in the compromise legislation.  As a three-footed economist with a foot in each camp, I think it was much ado about nothing.  Because dampening the economic recovery with a government shutdown was avoided, I feel like saying . . . whew.

The far greater problem is raising the debt ceiling.  If we fail to raise it, the cost of paying our national debt will start increasing rapidly from 7% of our GDP to something much higher.  This will decrease the funds available for either entitlement spending or discretionary spending.   Or, this will require even more borrowing.  When we miss that bullet, I will feel like saying . . . WHEW!

If this melodrama means that dogs and cats have finally learned to play together, I will feel like saying . . . Thank You, God!!!

Friday, April 8, 2011

Where is Miss Woodward?

Suspended between childhood and puberty, eighth graders are notoriously ill-behaved and ill-mannered.  My teacher that year was Mrs. Woodward, and I wish she was in Washington, where members of Congress are both ill-behaved and ill-mannered.  She did not tolerate disrespectful slackards and actually threw kids out of class if they were not working hard or playing well with others.

While it will certainy not be good for the economy, a short shutdown of a week or so will not do much damage to the economy, but why damage such a frail economy at all?

It is surprising to me that the stock market is so sanguine about a potential shutdown.  Futures indicate the market will be up 50 points at the open.  It obviously believes any shutdown will be short-term.  That would change dramatically if the shutdown is not short-term.

If Congress is this dysfunctional over a fraction of 1% of the budget, imagine how hysterical they will be when they begin "debating" the new budget of Paul Ryan, who is Chair of the House Budget Committee and actually deals with the far bigger problem of entitlements.  My fading faith in the democratic process comforts me . . . somewhat.

But, my biggest fear is that Congress will not raise the debt ceiling next month.  That would be far more important than any government shutdown!  While I have already sold almost all my Treasuries, I will sell the rest when I believe the debt limit will not be increased.  Not even Miss Woodward could have controlled the amoral, international 24/7 bond market . . . but she may have died trying!

Thursday, April 7, 2011

Is Money Everything ?

What a dumb question?  Everybody knows love, health, friends and other things are more important than money.  Yet, I was reading a new survey by the Associated Press that 25% of us have absolutely no savings and 25% of us say we have no plans to retire.  Is that just a coincidence?  I think so.  Money doesn't drive the retirement question as much as people (especially economists) seem to think.

Having watched several members of my family and many friends retire, I find few of them happy about it.  They may have too much time on their hands to worry about their health.  They might interfere with the lives of their children and others.  They may obsess over political issues they have no control over.  And, they fret 24/7 about out-living their money.

Another recent survey found people with jobs are happier than people without jobs.  More interestingly, it found that people without jobs are happier than people who have jobs they didn't like.

Tying those surveys together, my suspicion is that most people would like to work longer and put less stress on finances and themselves (and their families), IF they began their second career sooner, doing something they like.  Start your own business, be your own boss, and the world will get rosier, I promise!

The world would be a better place for those with gray hair if they read "What Color is Your Parachute:  For Retirement."

Tuesday, April 5, 2011

Kudos to Rep. Ryan (R-Wisconsin)

Last weekend, I wrote my quarterly column that will appear in next week's Inside Business.  I discussed the economic conference I attended last month in Washington, where speaker-after-speaker lamented the fact that neither Democrats nor Republican would deal with the financial cancer on this country, which is entitlements.  The Democrats did it last year and were accused of death panels and pulling the plug on grandma.  The Republicans know the same would happen to them and find it politically convenient to just let the Tea Party get hysterical over lesser important issues.

But, we may have been wrong?  Today, the Republican chairman of the House Budget Committee sacrificed himself by opening the discussion.  Upfront, I do NOT like the bill he introduced today and would love to vote against it, but I do have enormous respect for him.  He spoke the unspeakable, i.e., that we must cut Medicare and Medicaid.  He actually said that.

No, he is not in favor of death panels or pulling the plug on grandma.  Instead, he did his job.  He had the courage to do his job.  Maybe, just maybe . . . the debate can finally begin.

Of course, I hoped that might happen last year, when the Democrats tried . . .

Kudos to the Chinese, sorta . . .

World markets were down overnight, and the futures market suggested a slightly down open for our market.  The reason is that the Chinese are again attacking their problem with inflation, by raising interest rates for the fourth time since October.  In addition, they have raised their banking reserve requirements six times, to reduce bank lending.  This is in an effort to reduce demand and cool off their economy.

The problem with doing this is that demand from China is driving the world economy.  Without their engine, the global economy will slow. 

But, what impresses me is that they have a problem, they acknowledge it, and they deal with it.  We cannot even get our budget finalized, even though we are now halfway thru the fiscal year.  While I wouldn't sacrifice even one percent of our democracy for a dictatorship, I do have to admire their short-term efficiency.

Now, when are they going to admit they have a problem with human rights, acknowledge it, and deal with it?

" . . . unless they really have to."

Warren Buffett once joked that the way to have a small fortune in airline stocks was to invest a large one.  Their woes are well documented, i.e., high union costs, high fuel prices, and low fares.  Here is my solution to raising their revenue, by applying a well known economic principle.

It is called Elasticity of Demand and measures how a person changes their spending or demand in response to a change in price.  One example would be the heroin addict.  If the price goes up 10%, he doesn't reduce his demand or desire for the product.  His demand for it is unrelated to the price or is "inelastic."  For a cigarette smoker, he might reduce his demand slightly to a significant increase in price.  Gas is the same way; a price increase causes only a small reduction in demand for gas.  The point is this:  when consumers have an inelastic demand for your product, you can raise the prices as much as you want.

Airlines believe flyers will not choose to fly if prices are too high, but is that true?  Yesterday, I witnessed a woman crying as she felt violated from having a stranger rub their hands on her body, in a manner she thought inappropriate.  Then, I waited two hours to take off in Norfolk, because the rear door needed extra oil to engage the emergency exit chute (who knew?).  Returning last night, I experienced the creepiness of having a man rubbing my backside, to make sure I had no plans to explode it.  Then, we waited in a hot, stuffy cabin with some individuals in dire need of a shower, for a very long hour.

While I can remember when flying was glamourous and fun, I wonder why anybody would fly today if they didn't have to, which made me realize that the need to fly is inelastic.  My need to be in Atlanta yesterday was unrelated to price. I had to be there and did not have time to drive.  They should double all airfares immediately, because nobody flys unless they really have to.  Revenues would double, and airlines will be healthy again.

Problem solved!

Monday, April 4, 2011

The Special Forces of Financial Organizations

As I type this, I'm sitting in the Atlanta airport, after a day of board meetings for the National Association of Personal Financial Advisors (NAPFA).  Long ago and far away, I was privileged to serve in the U.S. Army Special Forces.  One of my best memories is being one of the best.

NAPFA gives me that feeling again.  To be a registered investment advisor with them, you have to be a Certified Financial Planner professional.  And, you have to be experienced!  And, you have to show a real financial plan, so they can examine your work.  And, they review an advisor's regulatory filings to make sure his record is clean.  Are you tired yet?

In addition, you cannot charge any commissions.  In addition, you cannot charge any hidden fees.  Everything has to be "on top of the table."  Now, here comes the big one:  it doesn't sound big, but it is!

A NAPFA-Registered Financial Advisor has to act in the best interests of the client.  He has a fiduciary responsibility to his client.  It is not good enough to give merely "suitable" advice to a client.  Now, why would anybody use a stockbroker??

Anyway, that's enough bragging . . . I'm just proud to be part of NAPFA.  In fact, when I get home tonight, I may get out my old Green Beret and wear it to bed.

Friday, April 1, 2011

216,000 and Growing . . .

Earlier in the week, the consensus estimate of the Jobs Report released this morning was that 225 thousand jobs were created in March.  Over the last few days, it drifted down to 200 thousand.  When the actual number of 216 thousand was released, the futures market had a nice pop-up.  It should be another good day in the market.  Hopefully, the 13 million people looking for jobs will find one soon!

Also, the unemployment rate dropped from 8.9% to 8.8%.  That's a long way from the high of 9.8% but even further from full employment, when 5-6% is unemployed.  The "real" level of long term unemployed, which includes those who have given up decreased from 16% to 15%, another good sign.

The surprising thing is that the labor force participation rate is barely changing.  Usually, the unemployment rate rises slightly before dropping over the long term, as those who have given up then try to return to the labor force.  For whatever reason, those who have given up still don't believe there are any jobs out there for them.  The conservative argument blames this on unemployment compensation, but this applies to those people who have already exhausted their benefits and have given up.  Maybe, they've gone to live with relatives or friends.  Many may be under-employed, doing a menial job.  Some may have qualified for welfare.  Some must be homeless.  If you think about how long this recession has been, since Q3 of 2007, it is a small wonder that those who have been most affected for so long, now have the least faith in the American dream, and that's sad!  Imagine the emotional damage of being unemployed for three years . . .

There has been some press coverage recently of discrimination against the long-term unemployed.  While I understand the reasoning of employers, I worry that we are creating a permanent under-class of long-term unemployed.  That would be so un-American!  The good news is that monthly job growth will continue to increase, and we might be able to avoid having a permanent under-class.